(The following statement was released by the rating agency)
Feb 7 - Fitch Ratings has placed SMP Deutschland GmbH's (SMP, formerly known
as Peguform GmbH) Long-term Issuer Default Rating (IDR) and Short-Term IDR of
'B' on Rating Watch Negative (RWN).
The RWN reflects increased parent credit risk. SMP's IDR benefits from a
one-notch uplift to 'B' from 'B-', representing potential support from the
stronger credit profile of its parents, Motherson Sumi Systems Limited (MSSL)
and Samvardhana Motherson International Limited (SMIL), which indirectly own a
combined 83.72% of SMP. A deterioration of the parents' creditworthiness would
jeopardise their ability to support SMP and the one-notch ratings uplift to
SMP's stand-alone ratings.
EUR93m out of the EUR190m debt taken to fund the acquisition of SMP is subject
to an abridgement option from mid-2013. An IPO of SMIL, whose proceeds were
intended to repay part of the acquisition facility, was planned in 2012, but did
not go through. We are concerned about the impact that a potential exercise of
the abridgement option would have on the parents' financial profile, liquidity
and ability to meet their covenants, if they were to debt-refinance the whole
amount.
Fitch expects to resolve the RWN in the near term, following a meeting with
management, further review of SMP's performance and plans and an evaluation of
the consequences that a potential exercise of the abridgement option would have
on SMP.
KEY DRIVERS
- Fairly Weak Business Profile:
SMP is a leading manufacturer of plastic car bumpers in Germany and Spain. It
benefits from a long-standing relationship with Volkswagen Group
('A-'/Positive). However, it is exposed to material concentration risks.
Specifically, more than 75% of sales are derived from Volkswagen, which gives
SMP poor price negotiation power, and geographic diversification is low. In
addition, its products are fairly homogenous, with few differentiating revenue
drivers from peers.
- Support from Parent:
The ratings benefit from a one-notch uplift from the stronger credit profile of
its Indian parent, MSSL. Fitch believes that MSSL is likely to provide support
to SMP should the latter experience difficulties because MSSL has a strategic
interest in SMP's strong relationship with Volkswagen and SMP's facility
agreement contains a cross-default clause that in case of default would also
affect the EUR190m SMP acquisition debt partially guaranteed by MSSL.
- Ring-Fencing from Parent:
SMP's cash reserves and cash generating ability are contractually ring-fenced
from the parent. The debt of EUR190m extended to the parent, Samvardhana
Motherson Peguform GmbH (formerly Forgu GmbH), to acquire SMP is not an
obligation of the latter and is fully guaranteed and serviced by the ultimate
parents SMFL and MSSL. This EUR190m is therefore not included in Fitch's
computation of SMP's leverage.
- Strong Pricing Pressures:
SMP does not expect EBIT margins on any of its products to increase to above 4%
in Europe. Margins could come under further pressure due to volatility in
automotive demand and raw material input prices.
- Barely Sufficient Cash Flow:
Fitch expects that, in the absence of a market downturn, cash flow from
operations (CFO) should be sufficient to cover debt repayment and investment
requirements. Fitch forecasts that the funds from operations (FFO)-adjusted
leverage of close to 4.0x at end-2012 will gradually decline towards 3x at
end-2014, assuming the economic climate does not deteriorate below Fitch's
expectation.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that could lead to positive rating actions
include:
The ratings could be affirmed with a Stable Outlook, following a resolution of
the RWN, if the risks associated with the potential exercise of the abridgement
option are addressed and support to SMP is unimpaired. In addition, the ratings
could be affirmed, if SMP's EBIT margin is above 2%, free cash flow (FCF) margin
is positive and FFO adjusted leverage is below 4.0x.
Negative: Future developments that could lead to negative rating action include:
Conversely, a deterioration of MSSL's or SMIL's credit profile, of their ability
to support SMP and potential ripple effects on SMP, could lead to a downgrade.
Equally, negative ratings pressure could materialise, if SMP's EBIT margin
remains below 2%, FCF remains negative or FFO adjusted leverage remains above
4.0x.
(Caryn Trokie, New York Ratings Unit)

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